Articles

New Tax Law Makes Significant Changes to How Residential Real Estate Developers Recognize Revenue on Construction Contracts by Arthur J. Lieberman

View Art's Profile
Posted on August 28, 2025 by Art Lieberman

Among the various provisions of the new tax and spending bill is a significant change to the tax accounting method condo developers must use to recognize income, removing a significant irritant to developers’ cash flow and tax efficiency.

Background

Developers of single-family homes and townhouses historically had the option to use the complete contract method (CCM) of accounting for their sales contracts. By contrast, condominium developers were required to use the percentage-of-completion capitalized cost method (PCCM). Although both types of developers construct owner-occupied residential real estate, the divergence of permissible tax accounting methods between the two has been challenging to explain from a tax policy standpoint, which has put condo developers at a significant tax and cash flow disadvantage to homebuilders.

Under the CCM, homebuilders recognize profit for tax purposes when a contract is complete and accepted by the customer. Conversely, condo developers using the PCCM recognize profit as a project progresses, based on the amount of work completed during a specific period. This resulted in condo developers and their investors having to recognize taxable “phantom income” on pre-sold units despite the absence of a final closing and cash proceeds to pay the tax.

Revenue Recognition Change Under OBBBA

The One Big Beautiful Bill Act (OBBBA), passed into law on July 4, 2025, prospectively eliminates the requirement for developers of condos to recognize profit on sales contracts using PCCM. Instead, all residential construction contracts entered into in taxable years beginning on or after July 4, 2025, may now use the CCM. This provides residential real estate developers of all sizes and product types with the ability to defer income recognition and related tax liabilities until their construction contracts are substantially complete, thereby simplifying their accounting processes and significantly improving cash flow for developers and investors.

For calendar-year condo developers, this means any contracts signed on or after January 1, 2026, will no longer be accounted for under PCCM. Affected taxpayers should consult with their tax advisors to determine the impact the effective date rules will have on their projects and implement strategies to mitigate these outcomes.

About the Author: Arthur J. Lieberman is a director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he works with public and private real estate companies and closely held businesses on deal structuring, tax planning, tax research, tax controversies and compliance issues. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or info@bpbcpa.com.